On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (the "Act"). The Act partially restores the federal income tax deduction for state and local sales and use taxes that was eliminated by Congress in 1986. Under the Act, taxpayers who itemize their deductions may elect to deduct state and local sales and use taxes paid during the tax year in lieu of the existing deduction for state and local income taxes. Although the election is available to all taxpayers who itemize, the sales and use tax deduction probably will be of most interest to taxpayers who reside in Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming (states that impose sales and use taxes but not a state income tax).

Taxpayers who make the election are entitled to deduct the actual amount of sales and use taxes paid during the tax year. Alternatively, taxpayers can elect to determine the amount of the deduction by using tables to be published by the Internal Revenue Service. Taxpayers who use the tables are also allowed to deduct the actual amount of sales and use taxes paid on the purchase of motor vehicles, boats and other similar items (to be specified by the Internal Revenue Service). The tables will be based on the average consumption by taxpayers, on a state-by-state basis (excluding expenditures for motor vehicles, boats, and other similar items), taking into account filing status, number of dependents, adjusted gross income, and the state and local general sales tax rates. Taxpayers who decide to take the deduction based on the actual taxes paid, rather than based on the tables, and those who deduct the actual amount of sales tax paid on vehicles, boats, and other similar items, must maintain records sufficient to demonstrate the payment of sales tax.

The sales and use tax deduction, like other itemized deductions, will only benefit taxpayers whose itemized deductions exceed the standard deduction. Additionally, the phaseout of itemized deductions (based on the taxpayer's adjusted gross income) and the application of the alternative minimum tax may limit the ability of certain taxpayers to enjoy the benefits of the deduction. The deduction is available for tax years 2004 and 2005.

Additional Information

This Update is only intended to provide a brief summary of the provisions of the Act that are discussed above.